From the Wall Street Journal:
Congress Takes Up Mortgages
One Proposal to Protect Homeowners May Chill Secondary Debt Market
By JAMES R. HAGERTY, KARA SCANNELL and SARAH LUECK
September 6, 2007; Page A7
Congress returned from vacation with a series of proposals that could reconfigure the mortgage market, suggesting lawmakers are in a mood to make substantial changes in the wake of the summer’s subprime mess.
Possible bills in both the House and the Senate would expand homeowner protections to cover more high-cost loans, crack down on prepayment penalties and prohibit brokers from steering borrowers toward more-costly loans. Critics blame such practices for encouraging mortgage brokers and lenders to push unsophisticated borrowers to accept loans with onerous terms.
The House version, which has yet to be introduced, could include a more controversial provision that would make buyers of mortgage debt on the secondary market liable for abusive practices by lenders. That provision will face stiff opposition and could chill an already-faltering secondary market.
The common ground between House and Senate Democrats increases the likelihood that Congress will complete some kind of mortgage legislation. The precise details and timing remain hard to predict.
…
Yesterday, Sen. Christopher Dodd of Connecticut, chairman of the Senate Banking Committee and a candidate for the Democratic presidential nomination, announced plans for an ambitious bill. One key part would ban payments to mortgage brokers known as yield-spread premiums, or YSPs, on subprime loans. Lenders pay YSPs to brokers when borrowers pay a higher interest rate than the best one they could qualify for. Critics say that gives brokers an incentive to push higher-cost loans. The mortgage industry says it can be a way for consumers to compensate brokers without paying upfront fees.The Dodd plan also would prohibit lenders from giving subprime loans to borrowers who could qualify for prime loans.
…
House Democrats want to address another, more problematic question: whether secondary buyers of mortgage debt should be legally liable for the underlying loans. Democrats acknowledge this is likely to be a sticking point.Lawmakers say they want to encourage good underwriting practices while being sensitive to industry complaints. Anne Canfield, executive director of the Consumer Mortgage Coalition, which represents national lenders, said that additional liability would increase interest rates by an average of 1.5 to two percentage points.
“One of the arguments we’ve got against regulation in any way of the secondary market is you will impinge on the market and kill the market,” said Mr. Frank. But “giving the investor some assurance of quality in what he or she is being asked to invest in is part of the role of regulation….It can help the market.”
…
State legislatures have tried assigning secondary liability in the past, with limited success. Georgia passed a law in 2002 that extended liability to a loan’s end buyer, essentially holding them responsible for the actions of underwriters. After mortgage underwriters threatened to leave the state and the major credit-rating concerns said they wouldn’t rate pools of mortgages that included Georgia loans, the legislature voted to weaken the liability component in 2003.A congressional push to add liability to the mortgage market will also likely face resistance from the Bush administration, which has been outspoken about the cost of lawsuits in driving overseas companies from doing business in the U.S.
“A lot of the key details [of the Senate plan] are missing,” said Kurt Pfotenhauer, a senior vice president at the Mortgage Bankers Association, a trade group. He agreed that YSPs need to be addressed, because of the potential for abuse, but said it isn’t clear that an outright ban is the best solution.
Mr. Pfotenhauer noted that Congress has struggled for years to achieve a consensus on how to combat predatory-lending practices. The issue is very hot now, he noted, because of a surge in defaults and foreclosures. But passing legislation still “isn’t a slam dunk,” he said.